The buzz-phrase of the moment is the pre-pack - the process where a buyer is lined up for a struggling business before it actually goes into administration.

There were several before Christmas, including Whittards of Chelsea and The Officers Club, while yesterday the retailer USC was put into pre-pack by its former owner, West Coast Capital, the private equity firm owned by Sir Tom Hunter. Dundonald, a subsidiary of West Coast, subsequently bought a number of USC's stores - leaving the rest with PKF, the administrator.

However, serious questions are now being raised about pre-packs, which have mushroomed since the Enterprise Act 2002.

The idea underpinning pre-packs is laudable enough. They allow an administrator to sell a business before it is irretrievably damaged by negative publicity - particularly those otherwise viable businesses that have been hamstrung by short-term cashflow problems.

Pre-packs also allow businesses to change hands relatively smoothly and, compared with the cost of insolvency practitioners, are relatively cheap. They also have the advantage of staving off liquidations and fire sales, which benefit no one.

What they were not designed to do was allow the owners of businesses to shake off creditors by simply putting the whole thing into administration and then, through a pre-arranged deal with the administrator, buying back the bits that they like.

There is no suggestion, of course, that Sir Tom was seeking to accomplish this in the case of USC.

But there is clear evidence that creditors, especially suppliers to businesses put into pre-pack, are losing out as a result of the process. It is also suspected that, in many pre-packs, administrators do not always “test the market” for a buyer as thoroughly as they might.

The helplessness of creditors in such situations was highlighted last year when the High Court ruled that a business can go into pre-pack even against the wishes of the leading creditor. Saving jobs is, it seems, regarded as more important than doing right by suppliers and creditors - even though jobs may be lost elsewhere as a consequence.

Some creditors are fighting back. HM Revenue & Customs, a big victim of pre-packs that was on the losing side in that crucial 2007 case, is said to be refusing to give VAT numbers to companies it suspects of going into pre-pack to dump and, indeed, dump on, their creditors.

Nor are pre-packs a magic bullet. R3, the trade body for insolvency practitioners, says the likelihood of a second insolvency rises from 38 per cent to 45 per cent if the business put into pre-pack is sold to a connected party. The retailers Mk One and MFI are good examples.

While the morality of pre-packs is often dubious, defenders claim that it is the lesser of two evils. It is an argument likely to be tested strongly during 2009.

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